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Global rise in prices of consumer commodities amidst the end of the pandemic crisis, which began even before the Ukraine-Russia conflict, is threatening the future of the global economy.

As experts point out, inflation is on the rise because after two years of pandemic-related restrictions consumer demand has become strong in all economies around the world. As a result, this caused a shortage in goods, as well as higher prices and costs of living. Decreasing volume of international shipping and air travels during the pandemic contributed to the raise of transport costs and uncertainty about the timing of shipments. If we add to this the economic impact of the war in Ukraine, however prolonged, expectations become even worse and more pessimistic.

Cause and effect

According to the latest International Monetary Fund (IMF) study, global inflation will jump by 1.5% in 2022 due to the Ukrainian-Russian conflict and its associated consequences, in particular the sharp rise in shipping costs. Although due to the pandemic, container shipping along global transoceanic trade routes has already risen 7 times in the 18 months since March 2020, and bulk cargoes have risen even more.

IMF findings show that "countries that import more of what they consume experience higher inflation, as do those that are more closely integrated into global supply chains. Similarly, the countries that tend to pay higher transport costs are those that are landlocked, low-income countries and especially island states".

However, things do not look better in the larger economies either. For example, the consumer price increase in the US this year is expected to be 7% against the earlier forecast of 4.5%, in the Eurozone 5% (vs. 2.6%) and in Great Britain 6.6% (vs. 4.5%).

In the US, the world's largest economy, inflation accelerated to 7.9% in February. This is the highest rate since 1982. The situation is similar in Europe. Annual inflation in 19 eurozone countries reached 5.9% last month. This is a record in the history of Eurostat observations since 1997. A year ago, the annual inflation rate in the Eurozone was just 0.9%. In the EU-27, annual price growth reached 6.2% in February.

A 31.7% year-on-year increase in energy prices in February has been said to be one of the main drivers of inflation. Over the past year, the price of natural gas has risen almost sixfold, which has automatically increased the price of nitrogen fertilizers, 80% of the cost of which is shaped by natural gas. Fertilizers have quadrupled in price since the beginning of 2020. This process has been seen in the cost of all other fertilizers as well. Prices of phosphate and potash fertilizers tripled during the reporting period, which is naturally effected the cost of agricultural products. As a result, global food prices rose by an average of 28% last year: wheat by 31.3%, corn by 44.1%, vegetable oil by 65.8%, sugar by 37.5%, etc.

The process is still ongoing and the situation is likely to get worse.

For example, the UN Food and Agriculture Organisation (FAO) believes that a global supply shortage due to the Russian-Ukrainian conflict could cause global food prices rise by 8-22% from their benchmark levels.

By the way, commercial shipping has been suspended in all Ukrainian ports due to military actions. According to US State Department spokeswoman Wendy Sherman, the Russian navy does not allow 94 Ukrainian ships with food stipulated for the global market to enter the Mediterranean Sea. Although Russia's exports of agricultural products are not subject to sanctions, it cannot ship them abroad due to restrictions imposed by international insurance companies.

Today, food prices have risen sharply in the Middle East and Africa. Wheat, maize and sunflower oil exports to this region from Ukraine and Russia were 40% and 70%, respectively. As alternative sources become more expensive, the famine situation is expected to reach deplorable levels, especially in the third world countries. Even if the war in Ukraine ends soon, it is unlikely that the market niche be filled in the short term. This means that inflation will accelerate.

FAO calculations of the potential impact of sudden and drastic reduction in grain and sunflower seed exports by the two countries indicate that these shortfalls could only be partially compensated by alternative sources during the 2022/2023 crop season. The ability of many exporting countries to increase production and supply may be constrained by high production and input costs.

Traditional tool of central banks

As noted by Fitch Ratings’ Chief Economist Brian Coulton, global inflation has returned with a double-digit force after at least two decades.

According to foreign experts, inflation was not entirely unexpected, as it was partly due to the measures taken to recover national economies. This caused an increase in demand and disruptions in supply and production chains.

However, there are other inflation factors that may prove to be more long-lasting. They include, as Domingo Sugranes of the Pablo VI Foundation points out, decarbonisation and economic concentration, allowing for excessive price effects. Additional factors are rising property and share prices, as well as rising commodity prices.

Meanwhile, central banks are trying to do their best to resolve the situation by adjusting interest rates. Experts believe that higher-than-expected inflation figures will force the European Central Bank (ECB) to end the era of negative rates earlier than previously planned. Traders expect ECB to raise rates twice by a quarter point by October 2022 compared to previous rates planned for December.

Meanwhile, the Bank of England decided to raise its benchmark interest rate from 0.5% to 0.75% at the end of its March meeting, as most analysts and economists expected. This is the third consecutive time since December, and the third time since the start of the coronavirus pandemic.

A large number of central banks have been resorting to a similar solutions in the last month, which is basically the only thing left to do in the current situation.

A rare exception was the Turkish central bank's decision not to change its key interest rate despite the continuing strong rise in consumer prices: Inflation in Turkey accelerated to 54.4% in February from 48.7% a month earlier. The figure was the highest in twenty years. The Turkish central bank prefers to pursue a "new economic model" accompanied by weak national currency (lira) and low interest rates.

Azerbaijan: a conservative approach

The Central Bank of Azerbaijan, which traditionally has had a conservative approach to monetary policy, on March 18 once again increased the discount rate by 0.25 percentage points to 7.75%, justifying this step by the "difficulties in predicting inflation in the context of high external geopolitical and geoeconomic risks".

"Since late February there has been a sharp rise in prices on commodity exchanges leading to rising inflationary trends in Azerbaijan's main partner countries," CBA said in a statement, not ruling out a tightening of monetary policy in the coming months.

However, according to a survey of households in Azerbaijan, over 24% of them expect inflation to accelerate in the country. According to the latest data, inflation in Azerbaijan was 1.1% in February 2022. Compared to February 2021, prices rose by 11.9% due to the impact of imported inflation.

"According to FAO calculations, last year the world food prices went up by 23%. In Azerbaijan, food prices have also increased. In 2021, 60% of total inflation accounted for food inflation," Prime Minister Ali Asadov said at the plenary session of Milli Majlis, delivering a report on the government's activities in 2021. He added that the anti-inflationary policy is now one of the important activities of the Azerbaijani government.

Meanwhile, CBA reassures that a significant depreciation of the national currency in some trading partner countries leads to limitation of import inflation from there to Azerbaijan. In addition, the rising prices of Azerbaijan's main export commodities, i.e. oil and gas, ensure the stability of the manat, which is more than half of the country’s macroeconomic stability.

Wait and hope

A number of international analysts believe that traditional tools to curb price increases may still be insufficient to reverse current inflationary pressures. We can therefore expect a prolonged period of high inflation globally.

"While some of the effects may not be fully apparent until many years from now, there are already clear signs that the ongoing war and the resulting spike in the prices of key commodities will make it difficult for policymakers in some countries to ensure a delicate balance between curbing inflation and supporting economic recovery from the pandemic," IMF analysts note.

As a result, the main problem with rising prices is the reduced purchasing power of people, especially those on average incomes. Employers are not always prepared to adjust salaries to inflation. Hence people can no longer buy as much as they used to, manufacturing companies no longer need to produce at full capacity, their profits drop and... eventually it all leads to economic recession.

Experts do not hide the fact that rising prices may cause social tensions in some countries. For example, "with weak social protection systems, few employment opportunities, limited budgetary space and a government that is not widely supported".

Yet they insist on not abusing the introduction of inflation control measures, particularly the increase of state subsidies, as this could put extra pressure on already weak budget accounts.

What can be done? Unfortunately, there are no clear recipes, as much will depend on the outcome of the military action in Ukraine. Therefore, most analysts cannot provide any forecasts or recommendations regarding the development of global inflation, preferring to wait...